Loan for S.D. beef plant relied on secret, offshore investors

Series of companies in the Caribbean facilitated $30 million for Aberdeen venture

Nov. 4, 2013

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The Northern Beef story so far

CONCEPT: The Northern Beef Packers plant was an ambitious attempt to bolster South Dakota’s economy by slaughtering the state’s cows in Aberdeen instead of shipping them out of state. FOREIGN INVESTORS: Through years of development and false starts, most of Northern Beef’s funding came from more than 100 foreign investors under the federal EB-5 program, where foreigners could get green cards for investing $500,000 in American businesses. EB-5: The state of South Dakota worked closely with the EB-5 program. It was promoted by Richard Benda, who then was secretary of Tourism and State Development and oversaw overseas investors. State official Joop Bollen also created private companies to manage EB-5 investments. Bollen resigned the same day he signed a contract for his own business to handle the state’s EB-5 program. INVESTIGATIONS: State and federal officials are investigating Northern Beef, its handling of the EB-5 program, and South Dakota’s economic development office. BENDA DEATH: Meanwhile, Benda died in late October from a gunshot wound. His death is being examined by authorities.

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In March, 2010, the once-promising Northern Beef Packers plant in Aberdeen was in trouble. The multimillion-dollar project was only partially completed, out of money, and in danger of collapse.

The rescue came from a mysterious corner. A company called “Epoch Star Limited” offered to loan $30 million to Northern Beef to complete the plant.

But Epoch Star wasn’t a bank. Instead, it was a company, incorporated in the British Virgin Islands, “solely for the purposes of providing a one-time lending facility of foreign investors to Northern Beef,” in the words of Northern Beef lawyer Rory King of Aberdeen.

Epoch Star, in turn, was wholly owned by another company, the Cayman Islands-incorporated Pine Street Special Opportunity Fund I. And both Epoch Star and Pine Street were run by a professional fund manager corporation called Anvil Asia Partners, also incorporated in the Cayman Islands but based out of Hong Kong.

Investors in Epoch Star and Pine Street were and remain secret. A petition filed with the state said Pine Street “consists of various organizations and high net worth individuals from the United States and Asia,” while an affidavit from an Anvil Asia director said there were fewer than 10 Pine Street investors. None of them, advocates said, were banks or “in the sole business of lending money.”

But South Dakota law imposes taxes and regulations on lending institutions. To avoid that, Epoch Star and Northern Beef asked South Dakota’s banking commission to rule that “Epoch does not engage in the business of lending money as contemplated” under South Dakota law, and thus was not subject to those laws.

In July 2010, the commission voted 4-0 to grant Epoch Star’s request.

“That’s as firm as we can get,” commissioner John Lillibridge of Burke said, according to a report on the meeting from the Mitchell Daily Republic.

Decision 'was not a big deal at the time'

Three years later, though, Lillibridge had little recollection of the decision.

“Frankly, I don’t remember it,” he said Monday. “I’m not very proud of (forgetting), but it was not a big deal, and it did not have a very lengthy conversation, or I would remember it.”

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Lillibridge guessed that Roger Novotny, then-director of banking, told the commission “these guys don’t qualify at all” as being in the money-lending business, and that the commission, lacking any objections, took Novotny’s advice.

Mike Rounds, who was governor, said the Epoch Star request was among his briefings but wasn’t presented as important.

“I remember they were doing a construction loan, and at the end of the national recession they had found a resource out there that they thought worked for them,” Rounds said. “It seems to me that was it. It was not a big deal at the time.”

When Northern Beef first asked for guidance, Novotny wrote back informally, agreeing with King that Epoch Star “is not in the business of lending money nor does it hold itself out to the public as a lender” and that “no lending licenses are needed.”

King then requested a more formal ruling from the full banking commission.

A phone number listed for Novotny in at his home in Fort Pierre is disconnected.

Bret Afdahl, the current director of the Division of Banking, said whether a given company counts as being in the money-lending business is a judgment call.

“That’s one of those wonderful things in the South Dakota code that’s used but not defined,” Afdahl said.

The law is intended to capture banks, payday lenders, student lenders, and other traditional loan sources, he said — while not applying to individuals who give loans to friends or neighbors.

Afdahl said the department or commission typically has to rule several times a year about whether a company is “in the business of lending money.” Every situation, he said, is a little different.

Lillibridge said the Epoch Star case was unusual. More often, he said, the commission has to rule on whether trust companies are in the lending business.

Company argued the rules didn't apply

In multiple affidavits and letters, representatives of Northern Beef and Epoch Star tried to differentiate their arrangement with that of more traditional loans.

Because its purpose was “bringing Northern Beef Packers, LP to operational status,” King argued, the loan from Epoch Star did not “require Epoch Star Limited to obtain a money-lending license” or pay banking taxes.

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In its formal ruling, the commission said that because “Epoch’s sole business is to make the loan to NBP and it will not engage in any other business,” it wasn’t in the business of money-lending.

Nor, the Banking Commission found, was Epoch Star “in the business of making mortgage loans as a mortgage lender,” even though its loan was secured by Northern Beef’s facility.

Had the Banking Commission ruled Epoch Star was subject to banking laws, it would have been required to apply for a money-lending license. That process typically takes several weeks, said Afdahl.

The licensing process also includes a $1,000 fee and requires the posting of a $10,000 surety bond.

Applying for license, opening the books

Applying for a license also would have meant the Division of Banking would have examined financial documents to determine whether to approve the license. Afdahl said the department might look at anyone who owns 10 percent or more of a company seeking such a license.

“Generally, we’re going to look at a financial statement of who the lending company is, to make sure they’re above water and solvent,” Afdahl said.

Lenders also must pay South Dakota’s bank franchise tax. That’s 6 percent per year on net income for companies with income below $400 million. If Epoch Star had to pay that tax on a full $30 million loan, it would have owed hundreds of thousands of dollars per year to the state because of the loan’s high interest rate.

High rate to protect the Korean investors

The “short-term bridge loan” from Epoch Star bore an effective 29 percent interest rate, according to a lawsuit filed by Joop Bollen, a figure closely connected to the financing of Northern Beef.

This high rate was justified, a leader with Anvil Asia Partners wrote in an affidavit, because of how risky the project was.

“This project is already distressed and insolvent,” wrote Wai Yee Christine Ma, a Hong Kong-based director of AAP. “If the NBP business fails or is jeopardized before Epoch can be paid. ... Epoch will have extraordinary difficulty recovering its investment. While Epoch’s loan will be secured by the real property and personal property assets of NBP, it is unlikely the collateral could be sold for any purpose other than as a beef plant. If the plant has already failed for some reason, the prospects that Epoch would substantially realize on its collateral would be dim. Thus, Epoch’s interest rate on its loan matches this extraordinarily high rate of risk.”

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In addition to saving the Northern Beef project, King wrote, the Epoch Star loan could save the plant’s initial investors from losing everything.

Previously, 69 Koreans had invested $500,000 each into Northern Beef under the federal EB-5 program, where foreigners can get green cards in return for investing in American businesses — but only if those businesses create at least 10 jobs.

“Due to unforeseen difficulties in the banking industry and the loss of previously committed financing, the project was halted thereby jeopardizing the current EB-5 investors’ immigration status,” King wrote in an email to Novotny, the state banking director at the time.

In his formal filing, King further wrote that the loan “will bail-out the EB-5 investors and prevent harm to the credibility of South Dakota’s important EB-5 program.”

Chinese investors' money replaced loan

But even with approval from the Banking Commission, the Epoch Star loan went away quickly.

Only $3 million ultimately was lent from Epoch Star to Northern Beef, the first of four planned loans that would make up the $30 million.

While the second loan was being developed, the Northern Beef plant used $35 million invested by 70 wealthy Chinese citizens to buy Epoch Star, along with the loan.

The loan from the Chinese investors was a mere 3.5 percent, far less than the Epoch rate.

“We began with them,” said David Palmer, the CEO of Northern Beef, in a September bankruptcy hearing for the company. “And at a point in time the cost of their loan was determined to be much higher than using the (Chinese investor) funds. And so we ... bought Epic and went directly to their funds.”